Prospectus Supplement
(To Prospectus Dated March 18, 1998)
140,600 MEDSSM
(Mandatorily Exchangeable Debt SecuritiesSM)
J.P. Morgan & Co. Incorporated
5.00% Exchangeable Notes Due July 21, 2000
(Subject to Exchange into Shares of Class A Common Stock, Par Value
$.01, of Ethan Allen Interiors Inc.)
The initial principal amount of each of the 5.00% Exchangeable Notes
Due July 21, 2000 (each, a "MEDS"), of J.P. Morgan & Co. Incorporated
("J.P. Morgan") being offered hereby will be $49.7870 (the "Initial
Price"). The MEDS will mature on July 21, 2000. Interest on the MEDS,
at the rate of 5.00% of the Initial Price per annum, is payable
quarterly on each January 22, April 22, July 22 and October 22,
beginning October 22, 1998. MEDS are not subject to redemption or any
sinking fund prior to maturity.
At maturity (including as a result of acceleration), the principal
amount of each MEDS will be mandatorily exchanged by J.P. Morgan into
a number of shares of Common Stock, par value $.01 ("Ethan Allen
Common Stock") of Ethan Allen Interiors Inc. ("Ethan Allen") (or, at
J.P. Morgan's option, cash with an equal value) at the Exchange Rate.
The Exchange Rate is equal to, subject to certain adjustments, (a) if
the Maturity Price per share of Ethan Allen Common Stock is less than
or equal to $75.75 (the "Capped Participation Price"), one share of
Ethan Allen Common Stock per MEDS, and (b) if the Maturity Price is
greater than the Capped Participation Price, a fractional share of
Ethan Allen Common Stock per MEDS so that the value of such fractional
share at the Maturity Price equals the Capped Participation Price. The
"Maturity Price" means the average Closing Price (as defined herein)
per share of Ethan Allen Common Stock on the 3 Trading Days (as
defined herein) ending on the second Trading Day immediately prior to
(but not including) the date of maturity. Accordingly, holders of the
MEDS will not necessarily receive an amount equal to the Initial Price
thereof. The MEDS will be an unsecured obligation of J.P. Morgan
ranking pari passu with all of its other unsecured and unsubordinated
indebtedness. See "Description of the MEDS."
The MEDS will be represented by Global Securities registered in the
name of the nominee of The Depository Trust Company, which will act as
the Depository. Interests in the MEDS represented by Global Securities
will be shown on, and transfers thereof will be effected only through,
records maintained by the Depository and its direct and indirect
participants. Except as described herein, MEDS in definitive form will
not be issued. Settlement for the MEDS will be made in immediately
available funds. The MEDS will trade in the Depository's Same-Day
Funds Settlement System and secondary market trading activity for the
MEDS will therefore settle in immediately available funds. All
payments of principal and interest will be made by J.P. Morgan in
immediately available funds or the equivalent.
For a discussion of certain United States federal income tax
consequences for holders of MEDS, see "Certain United States Federal
Income Tax Considerations."
Ethan Allen is not affiliated with J.P. Morgan and has no obligations
with respect to the MEDS. See "Risk Factors--No Affiliation Between
J.P. Morgan and Ethan Allen."
"MEDS" and "Mandatorily Exchangeable Debt Securities" are service
marks of J.P. Morgan.
Ethan Allen Common Stock is traded on the New York Stock Exchange
(the"NYSE") under the symbol "ETH". The MEDS will not be listed or
traded on any securities exchange or trading market.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSIDER CAREFULLY THE
INFORMATION CONTAINED UNDER "RISK FACTORS".
THESE SECURITIES ARE NOT SAVINGS OR DEPOSIT ACCOUNTS OR OTHER
OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER FEDERAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
J.P. Morgan Securities Inc. (the "Underwriter") proposes to offer the
MEDS from time to time for sale in one or more negotiated
transactions, or otherwise, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at
negotiated prices, in each case plus accrued interest, if any, from
July 22, 1998. The Underwriter has agreed to purchase the MEDS at 100%
of their principal amount ($7,000,052 aggregate proceeds to J.P.
Morgan before deducting expenses payable by J.P. Morgan), plus accrued
interest, if any, from July 22, 1998. J.P. Morgan has agreed to
indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting".
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The MEDS are offered subject to receipt and acceptance by J.P. Morgan
Securities Inc. (the "Underwriter"), to prior sales and to the
Underwriter's right to reject any order in whole or in part and to
withdraw, cancel or modify the offer without notice. It is expected
that delivery of the MEDS will be made at the office of J.P. Morgan &
Co. Incorporated, 60 Wall Street, New York, New York, or through the
facilities of The Depository Trust Company, on or about July 22, 1998.
J.P. Morgan & Co.
The date of this Prospectus Supplement is July 17, 1998
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF
THE MEDS AND THE ETHAN ALLEN COMMON STOCK. THE UNDERWRITER MAY
OVERALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR, AND
PURCHASE THE MEDS OR THE ETHAN ALLEN COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Incorporation of Certain Documents by Reference
J.P. Morgan hereby incorporates by reference in this Prospectus
Supplement J.P. Morgan's Annual Report on Form 10-K for the year ended
December 31, 1997 (included in its Annual Report to Stockholders),
J.P. Morgan's Quarterly Reports on Form 10-Q for the quarter ended
March 31, 1998, and J.P. Morgan's Reports on Form 8-K dated January
15, 1998, February 19, 1998, March 27, 1998, April 14, 1998, May 5,
1998 and July 14, 1998, heretofore filed pursuant to Section 13 of the
1934 Act.
In addition, all reports and definitive proxy or information
statements filed pursuant to Section 13(a), 13(c), 14 or 15(d) of the
1934 Act subsequent to the date of this Prospectus Supplement and
prior to the termination of the offering of the MEDS shall be deemed
to be incorporated by reference into this Prospectus Supplement and to
be a part hereof from the date of filing of such documents. Any
statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus Supplement to the extent
that a statement contained herein or in any subsequently filed
document which also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus Supplement.
J.P. Morgan will provide without charge to each person, including any
beneficial owner, to whom this Prospectus Supplement is delivered, on
the written or oral request of any such person, a copy of any or all
of the foregoing documents incorporated herein by reference (other
than exhibits to such documents). Written requests should be directed
to the Office of the Secretary, J.P. Morgan & Co. Incorporated, 60
Wall Street, New York, New York 10260-0060. Telephone requests may be
directed to (212) 648-2069.
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Risk Factors
As described in more detail below, the trading price of the MEDS may
vary considerably prior to maturity (including by acceleration or
otherwise, "Maturity") due to, among other things, fluctuations in the
price of Ethan Allen Common Stock and other events that are difficult
to predict and beyond J.P. Morgan's control.
Comparison to Other Debt Securities
The terms of the MEDS differ from those of ordinary debt securities in
that the amount that a holder of the MEDS will receive upon mandatory
exchange of the principal amount thereof at Maturity is not fixed, but
is based on the price of the Ethan Allen Common Stock as specified in
the Exchange Rate (as defined under "Description of the MEDS"). There
can be no assurance that such amount receivable by such holder upon
exchange at Maturity will be equal to or greater than the Initial
Price of the MEDS. For example, if the Maturity Price of the Ethan
Allen Common Stock is less than the Initial Price, such amount
receivable upon exchange will be less than the Initial Price paid for
the MEDS, in which case an investment in MEDS would result in a loss.
In addition, the opportunity for equity appreciation afforded by an
investment in the MEDS is less than the opportunity for equity
appreciation afforded by an investment in the Ethan Allen Common Stock
because the amount receivable by holders of the MEDS upon exchange at
Maturity will in no event exceed the Capped Participation Price (as
defined under "Description of the MEDS") of $75.75, regardless of the
Maturity Price of the Ethan Allen Common Stock, which represents an
appreciation of 52.15% over the Initial Price. Because the price of
the Ethan Allen Common Stock is subject to market fluctuations, the
value of the Ethan Allen Common Stock (or, at the option of J.P.
Morgan, the amount of cash) receivable by a holder of MEDS upon
exchange at Maturity, determined as described herein, may be more or
less than the Initial Price of the MEDS.
Relationship of MEDS and Ethan Allen Common Stock
The market price of MEDS at any time will be affected primarily by
changes in the price of Ethan Allen Common Stock. As indicated in
"Price Range and Dividend History of Ethan Allen Common Stock" herein,
the price of Ethan Allen Common Stock has been volatile during certain
recent periods.
It is impossible to predict whether the price of Ethan Allen Common
Stock will rise or fall. Trading prices of Ethan Allen Common Stock
will be influenced by Ethan Allen's operational results and by complex
and interrelated political, economic, financial and other factors that
can affect the capital markets generally, the stock exchanges or
quotation systems on which Ethan Allen Common Stock is traded and the
market segment of which Ethan Allen is a part. Trading prices of Ethan
Allen Common Stock may also be influenced if J.P. Morgan or other
persons hereafter issue securities with terms similar to those of the
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MEDS or if J.P. Morgan otherwise transfers shares of Ethan Allen
Common Stock owned by J.P. Morgan. As of July 17, 1998, a wholly owned
subsidiary of J.P. Morgan held or had the right to acquire
approximately 72,700 shares of Ethan Allen Common Stock, with sole
voting and investment power over all such shares. See "Ethan Allen
Interiors Inc." However, the Indenture does not contain any
restriction on the disposition of such stock by J.P. Morgan, and no
such shares of Ethan Allen Common Stock will be pledged or otherwise
held in escrow for use at Maturity of the MEDS. See "Description of
the MEDS--General".
Dilution of Ethan Allen Common Stock
The amount that holders of the MEDS are entitled to receive upon the
mandatory exchange at Maturity is subject to adjustment for certain
events arising from stock splits and combinations, stock dividends and
certain other actions of Ethan Allen that modify its capital
structure, such as certain issuances of rights or warrants. See
"Description of the MEDS--Dilution Adjustments." Such amount to be
received by such holders upon exchange at Maturity may not be adjusted
for other events, such as offerings of Ethan Allen Common Stock for
cash or in connection with acquisitions, that may adversely affect the
price of Ethan Allen Common Stock and, because of the relationship of
such amount to be received upon exchange to the price of Ethan Allen
Common Stock, such other events may adversely affect the trading price
of the MEDS. See "Ethan Allen Interiors Inc." There can be no
assurance that Ethan Allen will not make offerings of Ethan Allen
Common Stock or take such other action in the future or as to the
amount of such offerings, if any. In addition, until such time, if
any, as J.P. Morgan shall deliver shares of Ethan Allen Common Stock
to holders of the MEDS at Maturity thereof, holders of the MEDS will
not be entitled to any rights with respect to Ethan Allen Common Stock
(including, without limitation, the exercise of voting rights and the
right to receive any dividends or other distributions in respect
thereof).
No Affiliation Between J.P. Morgan and Ethan Allen
As of July 17, 1998, a wholly owned subsidiary of J.P. Morgan held or
had the right to acquire approximately 72,700 shares of Ethan Allen
Common Stock, with sole voting and investment power over all such
shares. However, J.P. Morgan may at any time to the extent legally
permitted purchase, sell or enter into any other transactions related
to Ethan Allen Common Stock without restriction.
J.P. Morgan is not affiliated with Ethan Allen and, although J.P.
Morgan has no knowledge that any of the events described in the
preceding subsection not heretofore publicly disclosed by Ethan Allen
are currently being contemplated by Ethan Allen or of any event that
would have a material adverse effect on Ethan Allen or on the price of
Ethan Allen Common Stock, such events are beyond J.P. Morgan's ability
to control and are difficult to predict.
Ethan Allen has no obligations with respect to the MEDS, including any
obligation to take the needs of J.P. Morgan or of holders of the MEDS
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into consideration for any reason. Ethan Allen will not receive any of
the proceeds of the offering of the MEDS made hereby and is not
responsible for, and has not participated in, the determination or
calculation of the amount receivable by holders of the MEDS at
Maturity. Ethan Allen is not involved with the administration or
trading of the MEDS and has no obligations with respect to the amount
receivable by holders of the MEDS at Maturity.
Possible Illiquidity of the Secondary Market
It is not possible to predict how the MEDS will trade in the secondary
market or whether such market will be liquid or illiquid. MEDS are
novel and innovative securities and there is currently no secondary
market for the MEDS. The Underwriter currently intends, but is not
obligated, to make a market in the MEDS. There can be no assurance
that a secondary market will develop or, if a secondary market does
develop, that it will provide the holders of the MEDS with liquidity
of investment or that it will continue for the life of the MEDS.
The MEDS will not be listed or traded on any securities exchange or
trading market. Thus, pricing information for the MEDS may be more
difficult to obtain than if the MEDS were listed or traded on a
securities exchange or trading market.
Uncertain United States Federal Income Tax Characterization of MEDS
No statutory, judicial or administrative authority directly addresses
the characterization of the MEDS or instruments similar to the MEDS
for U.S. federal income tax purposes. As a result, significant aspects
of the U.S. federal income tax consequences of an investment in the
MEDS are not certain. No ruling is being requested from the Internal
Revenue Service with respect to the MEDS and no assurance can be given
that the Internal Revenue Service will agree with the position taken
by J.P. Morgan. In particular, a holder of MEDS might be required to
accrue interest income at a rate in excess of the coupon on the MEDS.
See "Certain United States Federal Income Tax Considerations."
J.P. Morgan & Co. Incorporated
J.P. Morgan, whose origins date to a merchant banking firm founded in
London in 1838, is the holding company for a group of global
subsidiaries that provide a wide range of financial services to
corporations, governments, institutions and individuals. J.P. Morgan's
activities are summarized in the accompanying Prospectus.
As used in this Prospectus Supplement, unless the context otherwise
requires, the term "J.P. Morgan" refers to J.P. Morgan & Co.
Incorporated and its consolidated and unconsolidated subsidiaries.
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Use of Proceeds
The net proceeds (after use of proceeds for hedging purposes described
below) to be received by J.P. Morgan from the sale of the MEDS will be
used for general corporate purposes, including investment in equity
and debt securities and interest-bearing deposits of subsidiaries.
Pending such use, J.P. Morgan may temporarily invest the net proceeds
or may use them to reduce short-term indebtedness.
From time to time after the initial offering and prior to the Maturity
of the MEDS, depending on market conditions (including the market
price of Ethan Allen Common Stock), subsidiaries of J.P. Morgan may
use the remainder of the proceeds to be received by J.P. Morgan from
the sale of MEDS to engage in dynamic hedging techniques and may take
long or short positions in Ethan Allen Common Stock, in listed or
over-the-counter options contracts in, or other derivative or
synthetic instruments related to, the Ethan Allen Common Stock.
Ethan Allen Interiors Inc.
According to publicly available documents, Ethan Allen Interiors Inc.,
a Delaware corporation ("Ethan Allen"), is a leading manufacturer and
retailer of quality home furnishings, offering a full range of
furniture products and accessories. Ethan Allen is subject to the
informational requirements of the Securities Exchange Act of 1934 (the
"Exchange Act"). Accordingly, Ethan Allen files reports, proxy
statements and other information with the Securities and Exchange
Commission (the "Commission"). Copies of Ethan Allen's registration
statements, reports, proxy statements and other information may be
inspected and copied at certain offices of the Commission.
This Prospectus Supplement relates only to the MEDS offered hereby and
does not relate to the Ethan Allen Common Stock. All disclosures
contained in this Prospectus Supplement regarding Ethan Allen are
derived from the publicly available documents described in the
preceding paragraph. J.P. Morgan has not participated in the
preparation of such documents and has not made any due diligence
inquiry with respect to the information provided therein. There can be
no assurance that all events occurring prior to the date hereof
(including events that would affect the accuracy or completeness of
the publicly available documents described in the preceding paragraph)
that would affect the trading price of Ethan Allen Common Stock have
been publicly disclosed. Because the principal amount of the MEDS
payable at maturity is related to the trading price of Ethan Allen
Common Stock, such events, if any, would also affect the trading price
of the MEDS.
J.P. Morgan or one or more affiliates may presently be engaged or may
from time to time engage in business with Ethan Allen, including
extending loans to or making equity investments in Ethan Allen or
providing advisory services (such as merger and acquisition advisory
services) to Ethan Allen. In the course of such actions, J.P. Morgan
or such affiliates may acquire non-public information with respect to
Ethan Allen. Additionally, J.P. Morgan or its affiliates may publish
research reports with respect to Ethan Allen. However, J.P. Morgan
does not make
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any representation to any purchaser of MEDS with respect to any
matters whatsoever relating to Ethan Allen. Any prospective purchaser
of MEDS should undertake an independent investigation of Ethan Allen
to make an informed decision with respect to a potential investment in
Ethan Allen Common Stock.
Price Range and Dividend History of Ethan Allen Common Stock
Ethan Allen Common Stock is listed and traded on the NYSE under the symbol
"ETH". The following table sets forth, for the calendar quarterly periods
indicated, the high and low sales prices of the Ethan Allen Common Stock as
reported on the NYSE composite tape and cash dividends per share of Ethan
Allen Common Stock. All figures are adjusted for a two-for-one stock split
declared by Ethan Allen on August 6, 1997.
High Low Dividends
---- --- ---------
1996
First Quarter $13 1/2 $9 13/16 $0.02
Second Quarter 14 3/16 11 1/4 $0.02
Third Quarter 15 3/4 10 1/2 $0.02
Fourth Quarter 19 1/2 14 11/16 $0.02
1997
First Quarter $25 7/16 $18 1/2 $0.03
Second Quarter 29 3/16 19 5/8 $0.03
Third Quarter 37 13/16 24 25/32 $0.03
Fourth Quarter 42 7/8 30 $0.03
1998
First quarter $66 5/8 $34 5/16 $0.04
Second quarter 64 1/8 45 3/4 NA
Third Quarter 52 1/8 47 3/4 NA
(through July
17)
J.P. Morgan makes no representation as to the amount of dividends, if
any, that Ethan Allen will pay in the future. In any event, holders of
MEDS will not be entitled to receive any dividends that may be payable
on Ethan Allen Common Stock until such time as J.P. Morgan, if it so
elects, delivers Ethan Allen Common Stock at Maturity of the MEDS, and
then only with respect to dividends having a record date on or after
the date of delivery of such Ethan Allen Common Stock. See
"Description of the MEDS."
Although historical data with respect to Ethan Allen Common Stock is
included in these offering materials, investors should understand that
historical performance should not be taken as an indication of future
performance, and no assurance can be given, and none is intended to be
given, that the future performance of Ethan Allen Common Stock will
reflect past performance.
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Description of the MEDS
The following description of the particular terms of the MEDS
supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of Debt Securities set
forth in the Prospectus, to which description reference is hereby
made.
General
The MEDS are a single series of Debt Securities (as defined in the
Prospectus), to be issued under an indenture dated as of August 15,
1982, and all indentures supplemental thereto, including the First
Supplemental Indenture dated as of May 5, 1986, the Second
Supplemental Indenture dated as of February 27, 1996 and the Third
Supplemental Indenture dated as of January 30, 1997 (collectively
referred to as the "Indenture"), between J.P. Morgan and U.S. Bank
Trust National Association (formerly First Trust of New York, National
Association), successor to Chemical Bank (formerly Manufacturers
Hanover Trust Company), as trustee (the "Trustee").
The MEDS will be unsecured and will rank on a parity with all other
unsecured and unsubordinated indebtedness of J.P. Morgan. The
aggregate number of MEDS to be issued will be 140,600. The MEDS will
mature on July 21, 2000. In the future J.P. Morgan may issue
additional Debt Securities or other securities with terms similar to
those of the MEDS.
Each MEDS, which will be issued with a principal amount of $49.7870,
will bear interest at the annual rate of 5.00% of the Initial Price
per annum (or $2.49 per annum) from July 22, 1998, or from the most
recent Interest Payment Date to which interest has been paid or
provided for until the principal amount thereof is exchanged at
Maturity pursuant to the terms of the MEDS. Interest on the MEDS will
be payable quarterly in arrears on each January 22, April 22, July 22
and October 22, commencing October 22, 1998 (each, an "Interest
Payment Date"), to the persons in whose names the MEDS are registered
at the close of business on the last day of the calendar month
immediately preceding such Interest Payment Date, provided that
interest payable at Maturity shall be payable to the person to whom
the principal is payable. Interest on the MEDS will be computed on the
basis of a 360-day year of twelve 30-day months. If an Interest
Payment Date falls on a day that is not a Business Day (as defined
below), the interest payment to be made on such Interest Payment Date
will be made on the next succeeding Business Day with the same force
and effect as if made on such Interest Payment Date, and no additional
interest will accrue as a result of such delayed payment.
At Maturity (including as a result of acceleration or otherwise), the
principal amount of each MEDS will be mandatorily exchanged by J.P.
Morgan into a number of shares of Ethan Allen Common Stock at the
Exchange Rate (as defined below), and, accordingly, holders of the
MEDS will not necessarily receive an amount equal to the Initial Price
thereof. The "Exchange Rate" is equal to, subject to adjustment as a
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result of certain dilution events (see "--Dilution Adjustments"
below), (a) if the Maturity Price (as defined below) per share of
Ethan Allen Common Stock is less than or equal to $75.75 per share of
Ethan Allen Common Stock (the "Capped Participation Price"), one share
of Ethan Allen Common Stock per MEDS and (b) if the Maturity Price is
greater than the Capped Participation Price, a fractional share of
Ethan Allen Common Stock per MEDS so that the value of such fractional
share (determined at the Maturity Price) is equal to the Capped
Participation Price. No fractional shares of Ethan Allen Common Stock
will be issued at Maturity, as provided under "--Fractional Shares"
below. Notwithstanding the foregoing, J.P. Morgan may, at its option
in lieu of delivering shares of Ethan Allen Common Stock, deliver cash
in an amount equal to the value at the Maturity Price of such number
of shares of Ethan Allen Common Stock. On or prior to the seventh
Business Day prior to July 21, 2000, J.P. Morgan will notify The
Depository Trust Company and the Trustee stating whether the principal
amount of each MEDS will be exchanged for shares of Ethan Allen Common
Stock or cash. If J.P. Morgan elects to deliver shares of Ethan Allen
Common Stock, the shares which are delivered to the holders of the
MEDS which are not affiliated with Ethan Allen shall be free of any
transfer restrictions, and the holders of the MEDS will be responsible
for the payment of any and all brokerage costs upon the subsequent
sale of such shares.
The "Maturity Price" is defined as the average Closing Price per share
of Ethan Allen Common Stock on the 3 Trading Days ending on the second
Trading Day immediately prior to (but not including) the Maturity
date. The "Closing Price" of any security on any date of determination
means the closing sale price (or, if no closing price is reported, the
last reported sale price) of such security on the NYSE on such date
or, if such security is not listed for trading on the NYSE on any such
date, as reported in the composite transactions for the principal
United States securities exchange on which such security is so listed,
or if such security is not so listed on a United States national or
regional securities exchange, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System, or, if such
security is not so reported, the last quoted bid price for such
security in the over-the-counter market as reported by the National
Quotation Bureau or similar organization, or, if such bid price is not
available, the market value of such security on such date as
determined by a nationally recognized independent investment banking
firm retained for such purpose by J.P. Morgan. A "Trading Day" is
defined as a day on which the security the Closing Price of which is
being determined (A) is not suspended from trading on any national or
regional securities exchange or association or over-the-counter market
at the close of business and (B) has traded at least once on the
national or regional securities exchange or association or
over-the-counter market that is the primary market for the trading of
such security. "Business Day" means any day, other than a Saturday or
Sunday, on which banking institutions in The City of New York are open
for business.
For illustrative purposes only, the following chart shows the number
of shares of Ethan Allen Common Stock or the amount of cash that a
holder of MEDS would receive for each MEDS at various Maturity Prices.
The table assumes that there will be no adjustments to the Exchange
Rate described under "--Dilution Adjustments" below. There can be no
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assurance that the Maturity Price will be within the range set forth
below. Given the Initial Price of $49.7870 per MEDS and the Capped
Participation Price of $75.75, a MEDS holder would receive at Maturity
the following number of shares of Ethan Allen Common Stock or amount
of cash (if J.P. Morgan elects to pay the MEDS in cash):
Maturity Price Number of
of Ethan Allen Shares of Ethan Allen
Common Stock Common Stock Amount of Cash
$40.00 1.000000 $40.00
$50.00 1.000000 $50.00
$60.00 1.000000 $60.00
$75.75 1.000000 $75.75
$80.00 0.946875 $75.75
$100.00 0.757500 $75.75
Interest on the MEDS will be payable, and delivery of Ethan Allen
Common Stock (or, at the option of J.P. Morgan, its cash equivalent)
in exchange for the MEDS at Maturity will be made upon surrender of
such MEDS, at the office or agency of J.P. Morgan maintained for such
purposes; provided that payment of interest may be made at the option
of J.P. Morgan by check mailed to the persons in whose names the MEDS
are registered at the close of business on the last day of the
calendar month immediately preceding the applicable Interest Payment
Date. See "--Book-Entry System." Initially such office will be at the
principal corporate trust office of the Trustee.
The MEDS will be transferable at any time or from time to time at the
aforementioned office. No service charge will be made to the holder
for any such transfer except for any tax or governmental charge
incidental thereto.
The Indenture does not contain any restriction on the ability of J.P.
Morgan to sell, pledge or otherwise convey all or any portion of the
Ethan Allen Common Stock held by it, and no such shares of Ethan Allen
Common Stock will be pledged or otherwise held in escrow for use at
Maturity of the MEDS. Consequently, in the event of a bankruptcy,
insolvency or liquidation of J.P. Morgan, the Ethan Allen Common
Stock, if any, owned by J.P. Morgan will be subject to the claims of
the creditors of J.P. Morgan. In addition, as described herein, J.P.
Morgan will have the option, exercisable in its sole discretion, to
satisfy its obligations pursuant to the mandatory exchange for the
principal amount of each MEDS at Maturity by delivering to holders of
the MEDS either the specified number of shares of Ethan Allen Common
Stock or cash in an amount equal to the value of such number of shares
at the Maturity Price. In the event of such a sale, pledge or
conveyance, a holder of the MEDS may be more likely to receive cash in
lieu of Ethan Allen Common Stock. As a result, there can be no
assurance that J.P. Morgan will elect at Maturity to deliver Ethan
Allen Common Stock or, if it so
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elects, that it will use all or any portion of its current holdings of
Ethan Allen Common Stock to make such delivery. Consequently, holders
of the MEDS will not be entitled to any rights with respect to Ethan
Allen Common Stock (including, without limitation, the exercise of
voting rights and any right to receive any dividends or other
distributions in respect thereof) until such time, if any, as J.P.
Morgan shall have delivered shares of Ethan Allen Common Stock to
holders of the MEDS at Maturity thereof.
Dilution Adjustments
The Exchange Rate is subject to adjustment if Ethan Allen shall (i)
pay a stock dividend or make a distribution with respect to Ethan
Allen Common Stock in shares of such stock, (ii) subdivide or split
its outstanding shares of Ethan Allen Common Stock, (iii) combine its
outstanding shares of Ethan Allen Common Stock into a smaller number
of shares, (iv) issue by reclassification of its shares of Ethan Allen
Common Stock any shares of common stock of Ethan Allen, (v) issue
rights or warrants to all holders of Ethan Allen Common Stock
entitling them to subscribe for or purchase shares of Ethan Allen
Common Stock at a price per share less than the market price at such
time of the Ethan Allen Common Stock (other than rights to purchase
Ethan Allen Common Stock pursuant to a plan for the reinvestment of
dividends or interest) or (vi) pay a dividend or make a distribution
to all holders of Ethan Allen Common Stock of evidences of its
indebtedness or other assets (excluding any dividends or distributions
referred to in clause (i) above and any cash dividends other than any
Extraordinary Cash Dividends) or issue to all holders of Ethan Allen
Common Stock rights or warrants to subscribe for or purchase any of
its securities (other than those referred to in clause (v) above). In
the case of the events referred to in clauses (i), (ii), (iii) and
(iv) above, the Exchange Rate in effect immediately prior to such
event shall each be adjusted so that the holder of any MEDS shall
thereafter be entitled to receive, upon mandatory exchange of the
principal amount of such MEDS at Maturity, the number of shares of
Ethan Allen Common Stock (or cash in lieu thereof) which such holder
would have been entitled to receive immediately following any such
event had such MEDS been exchanged immediately prior to such event or
any record date with respect thereto. In the case of the event
referred to in clause (v) above, the Exchange Rate shall be adjusted
by multiplying the Exchange Rate in effect immediately prior to the
date of issuance of the rights or warrants referred to in clause (v)
above by a fraction, the numerator of which shall be the sum of the
number of shares of Ethan Allen Common Stock outstanding on the date
of issuance of such rights or warrants immediately prior to such
issuance plus the number of additional shares of Ethan Allen Common
Stock offered for subscription or purchase pursuant to such rights or
warrants, and the denominator of which shall be the sum of the number
of shares of Ethan Allen Common Stock outstanding on the date of
issuance of such rights or warrants immediately prior to such issuance
plus the number of additional shares of Ethan Allen Common Stock which
the aggregate offering price of the total number of shares of Ethan
Allen Common Stock so offered for subscription or purchase pursuant to
such rights or warrants would purchase at the market price (determined
as the average Closing Price per share of Ethan Allen Common Stock on
the 3 Trading
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Days ending on the second Trading Day immediately prior to the date
such rights or warrants are issued), which shall be determined by
multiplying such total number of shares by the exercise price of each
such right or warrant and dividing the product so obtained by such
market price. To the extent that shares of Ethan Allen Common Stock
are not delivered after the expiration of such rights or warrants, the
Exchange Rate shall be readjusted to the Exchange Rate which would
then be in effect had such adjustments for the issuance of such rights
or warrants been made upon the basis of delivery of only the number of
shares of Ethan Allen Common Stock actually delivered. In the case of
the event referred to in clause (vi) above, the Exchange Rate shall be
adjusted by multiplying the Exchange Rate in effect on the record
date, by a fraction, the numerator of which shall be the market price
per share of the Ethan Allen Common Stock on the record date for the
determination of stockholders entitled to receive the dividend or
distribution referred to in clause (vi) above (such market price being
the average Closing Price per share of Ethan Allen Common Stock on the
3 Trading Days ending on the second Trading Day immediately prior to
such record date) and the denominator of which shall be such market
price per share of Ethan Allen Common Stock less the fair market value
(as determined by a nationally recognized independent investment
banking firm retained for such purpose by J. P. Morgan) as of such
record date of the portion of the assets or evidences of indebtedness
so distributed or of such subscription rights or warrants applicable
to one share or Ethan Allen Common Stock. As used herein, an
"Extraordinary Cash Dividend" means, with respect to any one-year
period, all cash dividends on the Ethan Allen Common Stock during such
period to the extent such dividends exceed on a per share basis 10% of
the average price of the Ethan Allen Common Stock over such period
(less any such dividends for which a prior adjustment to the Exchange
Rate was previously made). All adjustments to the Exchange Rate will
be calculated to the nearest 1/10,000th of a share of Ethan Allen
Common Stock (or if there is not a nearest 1/10,000th of a share, to
the next lower 1/10,000th of a share). No adjustment in the Exchange
Rate shall be required unless such adjustment would require an
increase or decrease of at least one percent therein; provided,
however, that any adjustments which by reason of the foregoing are not
required to be made shall be carried forward and taken into account in
any subsequent adjustment.
In the event of (A) any consolidation or merger of Ethan Allen, or any
surviving entity or subsequent surviving entity of Ethan Allen (an
"Ethan Allen Successor"), with or into another entity (other than a
merger or consolidation in which Ethan Allen is the continuing
corporation and in which the Ethan Allen Common Stock outstanding
immediately prior to the merger or consolidation is not exchanged for
cash, securities or other property of Ethan Allen or another
corporation), (B) any sale, transfer, lease or conveyance to another
corporation of the property of Ethan Allen or any Ethan Allen
Successor as an entirety or substantially as an entirety, (C) any
statutory exchange of securities of Ethan Allen or any Ethan Allen
Successor with another corporation (other than in connection with a
merger or acquisition) or (D) any liquidation, dissolution or winding
up of Ethan Allen or any Ethan Allen Successor (any such event, a
"Reorganization Event"), the Exchange Rate used to determine the
amount payable upon exchange at Maturity for each MEDS will be
adjusted to provide that each
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holder of MEDS will receive at Maturity cash in an amount equal to (a)
if the Transaction Value (as defined below) is less than or equal to
the Capped Participation Price, the Transaction Value, and (b) if the
Transaction Value is greater than the Capped Participation Price, the
Capped Participation Price. As used herein, "Transaction Value" means
(i) for any cash received in any such Reorganization Event, the amount
of cash received per share of Ethan Allen Common Stock, (ii) for any
property other than cash or securities received in any such
Reorganization Event, an amount equal to the market value at Maturity
of such property received per share of Ethan Allen Common Stock as
determined by a nationally recognized independent investment banking
firm retained for such purpose by J.P. Morgan and (iii) for any
securities received in any such Reorganization Event, an amount equal
to the average Closing Price per share of such securities on the 3
Trading Days ending on the second Trading Day immediately prior to
Maturity multiplied by the number of such securities received for each
share of Ethan Allen Common Stock. Notwithstanding the foregoing, in
lieu of delivering cash as provided above, J.P. Morgan may at its
option deliver an equivalent value of securities or other property
received in such Reorganization Event, determined in accordance with
clause (ii) or (iii) above, as applicable. If J.P. Morgan elects to
deliver securities or other property, holders of the MEDS will be
responsible for the payment of any and all brokerage and other
transaction costs upon the sale of such securities or other property.
The kind and amount of securities into which the MEDS shall be
exchangeable after consummation of such transaction shall be subject
to adjustment as described in the immediately preceding paragraph
following the date of consummation of such transaction.
J.P. Morgan is required, within ten Business Days following the
occurrence of an event that requires an adjustment to the Exchange
Rate (or if J.P. Morgan is not aware of such occurrence, as soon as
practicable after becoming so aware), to provide written notice to the
Trustee of the occurrence of such event and a statement in reasonable
detail setting forth the method by which the adjustment to the
Exchange Rate was determined and setting forth the revised Exchange
Rate.
Notwithstanding the foregoing, the principal amount of each MEDS
payable at Maturity will not, under any circumstances, exceed 152.15%
of the Initial Price of such MEDS.
Fractional Shares
No fractional shares of Ethan Allen Common Stock will be issued if
J.P. Morgan exchanges the MEDS for shares of Ethan Allen Common Stock.
In lieu of any fractional share otherwise issuable in respect of all
MEDS of any holder which are exchanged at Maturity, such holder shall
be entitled to receive an amount in cash equal to the value of such
fractional share at the Maturity Price.
Redemption
The MEDS are not subject to redemption prior to Maturity.
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Merger and Consolidation
J.P. Morgan may consolidate or merge with or into any other
corporation or association, and J.P. Morgan may sell or transfer all
or substantially all of its property or assets to any corporation or
association, provided that (i) the corporation (if other than J.P.
Morgan) or association formed by or resulting from any such
consolidation or merger or which shall have received such property or
assets shall assume the payment at maturity to holders of MEDS and
interest on the MEDS and the performance and observance of all the
terms, covenants and conditions of the MEDS to be performed or
observed by J.P. Morgan and (ii) J.P. Morgan or such successor
corporation shall not immediately thereafter be in default under the
terms of the MEDS.
Modification and Waiver
Modification and amendment of certain provisions of the MEDS may be
effected by J.P. Morgan without the consent of any of the holders of
the outstanding MEDS affected thereby to: (i) evidence succession of
another corporation or association to J.P. Morgan and the assumption
by such a party of the obligations of J.P. Morgan under the MEDS in
the event of a merger, consolidation or sale of assets in accordance
with the terms of the MEDS; (ii) add further covenants, restrictions
or conditions for the protection of holders of the MEDS; or (iii) cure
ambiguities or correct the MEDS in case of defects or inconsistencies
in the provisions thereof or to supplement with such other provisions,
so long as any such cure, correction or supplement does not adversely
affect the interest of the holders of the MEDS in any material
respect. In no event may J.P. Morgan, without the consent of the
holder of each outstanding MEDS affected thereby, extend the maturity
of any MEDS, or reduce the rate or extend the time of payment of
interest thereon, or reduce the payment due at maturity thereof, or
make the payment due at maturity or interest thereon payable in any
coin, currency or property other than as provided in the MEDS.
Events of Default
An Event of Default (as defined in the Indenture) with respect to the
MEDS will be: (a) default for 30 days in payment of any interest on
the MEDS; (b) default in the payment of the amount due at maturity;
(c) default by J.P. Morgan in the performance of any other covenant or
warranty contained in the MEDS, which continues for 90 days after
receipt of written notice given by either the Trustee or the holders
of at least 25% in principal amount of the MEDS outstanding; or (d)
certain events of bankruptcy or reorganization of J.P. Morgan. If an
Event of Default described in clause (a), (b) or (c) above shall have
occurred and be continuing, either the Trustee or the holders of at
least 25% in principal amount of the MEDS outstanding may declare the
principal of all outstanding MEDS and the interest accrued thereon, if
any, to be due and payable immediately. If an Event of Default
described in clause (d) above shall have occurred and be continuing,
either the Trustee or the holders of MEDS that, together with holders
of all other Debt Securities under the Indenture, hold at least 25% in
principal amount (in the case
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of MEDS, as determined at the time thereof) of all Debt Securities
then outstanding (voting as one class) may declare the principal of
all Debt Securities then outstanding (including the MEDS) and the
interest accrued thereon, if any, to be due and payable immediately.
Upon certain conditions, such declarations may be annulled and past
defaults (except for defaults in the payment of principal of, or
interest on, the MEDS) may be waived by the holders of a majority in
principal amount of the MEDS then outstanding.
The holders of a majority in principal amount of the MEDS shall have
the right to direct the time, method and place of conducting any
proceeding for any remedy with respect to the MEDS available to the
Trustee under the Indenture, subject to certain limitations specified
therein, provided that the holders of MEDS shall have offered to the
Trustee reasonable indemnity against expenses and liabilities.
Book-Entry System
It is expected that the MEDS will be issued in the form of one or more
global securities (the "Global Securities") deposited with The
Depository Trust Company (the "Depositary") and registered in the name
of a nominee of the Depositary.
The Depositary has advised J.P. Morgan and the Underwriter as follows:
The Depositary is a limited-purpose trust company organized under the
laws of the State of New York, a member of the Federal Reserve System,
a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to Section
17A of the Exchange Act. The Depositary was created to hold securities
of persons who have accounts with the Depositary ("participants") and
to facilitate the clearance and settlement of securities transactions
among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of certificates. Such
participants include securities brokers and dealers, banks, trust
companies and clearing corporations. Indirect access to the
Depositary's book-entry system is also available to others, such as
banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, either directly
or indirectly.
Upon the issuance of a Global Security, the Depositary or its nominee
will credit the respective MEDS represented by such Global Security to
the accounts of participants. The accounts to be credited shall be
designated by the Underwriter. Ownership of beneficial interests in
such Global Securities will be shown on, and the transfer of those
ownership interests will be effected only through, records maintained
by the Depositary or its nominee for such Global Securities. Ownership
of beneficial interests in such Global Securities by persons that hold
through participants will be shown on, and the transfer of that
ownership interest within such participant will be effected only
through, records maintained by such participant. The laws of some
jurisdictions require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits
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and such laws may impair the ability to transfer beneficial interests
in a Global Security.
So long as the Depositary for a Global Security, or its nominee, is
the registered owner of such Global Security, such depositary or such
nominee, as the case may be, will be considered the sole owner or
holder of the MEDS for all purposes under the Indenture. Except as set
forth below, owners of beneficial interests in such Global Securities
will not be entitled to have the MEDS registered in their names, will
not receive or be entitled to receive physical delivery of the MEDS in
definitive form and will not be considered the owners or holders
thereof under the Indenture.
Payment of principal of and any interest on the MEDS registered in the
name of or held by the Depositary or its nominee will be made to the
Depositary or its nominee, as the case may be, as the registered owner
or the holder of the Global Security. None of J.P. Morgan, the
Trustee, any Paying Agent or any securities registrar for the MEDS
will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial
ownership interests in a Global Security or for maintaining,
supervising or reviewing any records relating to such beneficial
ownership interests.
J.P. Morgan expects that the Depositary, upon receipt of any payment
of principal or interest in respect of a permanent Global Security,
will credit immediately participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the
principal amount of such Global Security as shown on the records of
the Depositary. J.P. Morgan also expects that payments by participants
to owners of beneficial interests in such Global Security held through
such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the
accounts of customers in bearer form or registered in "street name,"
and will be the responsibility of such participants.
A Global Security may not be transferred except as a whole by the
Depositary to a nominee or a successor of the Depositary. If the
Depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by J.P. Morgan
within ninety days, J.P. Morgan will issue MEDS in definitive
registered form in exchange for the Global Security representing such
MEDS.
Notwithstanding the foregoing, J.P. Morgan may at any time (including
at the time of original issuance of the MEDS) and in its sole
discretion determine not to have any MEDS represented by one or more
Global Securities and, in such event, will issue MEDS in definitive
form in exchange for all of the Global Securities representing the
MEDS. Further, if J.P. Morgan so specifies with respect to the MEDS,
an owner of a beneficial interest in a Global Security representing
MEDS may, on terms acceptable to J.P. Morgan and the Depositary for
such Global Security, receive MEDS in definitive form. In any such
instance, an owner of a beneficial interest in a Global Security will
be entitled to physical delivery in definitive form of MEDS
represented by such Global Security equal in number to that
represented by such beneficial interest and to have such MEDS
registered in its name.
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Regarding the Trustee
The Trustee has its principal corporate trust office at 100 Wall
Street, Suite 1600, New York, New York, 10005.
Certain United States Federal Income Tax Considerations
The following discussion is based upon the advice of tax counsel to
J.P. Morgan, Cravath, Swaine & Moore ("Tax Counsel"), as to certain of
the material U.S. federal income tax consequences that may be relevant
to a citizen or resident of the United States, a corporation,
partnership or other entity created or organized under the laws of the
United States and an estate or trust the income of which is subject to
U.S. federal income taxation regardless of its source (any of the
foregoing, a "U.S. person") who is the beneficial owner of a MEDS (a
"U.S. Holder"). All references to "holders" (including U.S. Holders)
are to beneficial owners of the MEDS. This summary is based on U.S.
federal income tax laws, regulations, rulings and decisions in effect
as of the date of this Prospectus Supplement, all of which are subject
to change at any time (possibly with retroactive effect). As the law
is technical and complex, the discussion below necessarily represents
only a general summary.
This summary addresses the U.S. federal income tax consequences to
holders who are initial holders of the MEDS, who purchase the MEDS at
par and who will hold the MEDS and, if applicable, the Ethan Allen
Common Stock as capital assets. This summary does not address all
aspects of federal income taxation that may be relevant to a
particular holder in light of his or its individual investment
circumstances or to certain types of holders subject to special
treatment under the U.S. federal income tax laws, such as dealers in
securities or foreign currency, financial institutions, insurance
companies, tax-exempt organizations and taxpayers holding the MEDS as
part of a "straddle," "hedge," "conversion transaction," "synthetic
security," or other integrated investment. Moreover, the effect of any
applicable state, local or foreign tax laws is not discussed.
No statutory, judicial or administrative authority directly addresses
the characterization of the MEDS or instruments similar to the MEDS
for U.S. federal income tax purposes. As a result, significant aspects
of the U.S. federal income tax consequences of an investment in the
MEDS are not certain. No ruling is being requested from the Internal
Revenue Service (the "IRS") with respect to the MEDS, no opinion
thereon is being given by Tax Counsel and no assurance can be given
that the IRS will agree with the conclusions expressed herein.
ACCORDINGLY, A PROSPECTIVE INVESTOR (INCLUDING A TAX-EXEMPT INVESTOR)
IN THE MEDS SHOULD CONSULT ITS TAX ADVISOR IN DETERMINING THE TAX
CONSEQUENCES OF AN INVESTMENT IN THE MEDS, INCLUDING THE APPLICATION
OF STATE, LOCAL OR OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES
IN FEDERAL OR OTHER TAX LAWS.
Pursuant to the terms of the Indenture, J.P. Morgan and every holder
of a MEDS will be obligated (in the absence of an administrative
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determination or judicial ruling to the contrary) to characterize a
MEDS for all tax purposes as a forward purchase contract to purchase
Ethan Allen Common Stock at Maturity (including as a result of
acceleration or otherwise), under the terms of which contract (a) at
the time of issuance of the MEDS the holder deposits irrevocably with
J.P. Morgan a fixed amount of cash equal to the purchase price of the
MEDS to assure the fulfillment of the holder's purchase obligation
described in clause (c) below, which deposit will unconditionally and
irrevocably be applied at Maturity to satisfy such obligation, (b)
until Maturity J.P. Morgan will be obligated to pay interest on such
deposit at a rate equal to the stated rate of interest on the MEDS as
compensation to the holder for J.P. Morgan's use of such cash deposit
during the term of the MEDS, and (c) at Maturity such cash deposit
unconditionally and irrevocably will be applied by J.P. Morgan in full
satisfaction of the holder's obligation under the forward purchase
contract, and J.P. Morgan will deliver to the holder the number of
shares of Ethan Allen Common Stock that the holder is entitled to
receive at that time pursuant to the terms of the MEDS (subject to
J.P. Morgan's right to deliver cash in lieu of the Ethan Allen Common
Stock). (Prospective investors should note that cash proceeds of this
offering will not be segregated by J.P. Morgan during the term of the
MEDS, but instead will be commingled with J.P. Morgan's other assets
and applied in a manner consistent with the "Use of Proceeds"
discussion above.) Consistent with the above characterization, (i)
amounts paid to J.P. Morgan in respect of the original issue of a MEDS
will be treated as allocable in their entirety to the amount of the
cash deposit attributable to such MEDS and (ii) amounts denominated as
interest that are payable with respect to the MEDS will be
characterized as interest payable on the amount of such deposit,
includible annually in the income of a U.S. Holder as interest income
in accordance with such holder's method of accounting.
Under the above characterization of the MEDS, a holder's tax basis in
a MEDS generally will equal the holder's cost of that MEDS. Upon the
sale of other taxable disposition of a MEDS, a U.S. Holder generally
will recognize gain or loss equal to the difference between the amount
realized on the sale or other taxable disposition and the U.S.
Holder's tax basis in the MEDS. Such gain or loss generally will be
long-term capital gain or loss if the U.S. Holder has held the MEDS
for more than one year at the time of disposition.
Under the above characterization of the MEDS, if J.P. Morgan delivers
Ethan Allen Common Stock at Maturity, a U.S. Holder will recognize no
gain or loss on the purchase of the Ethan Allen Common Stock against
application of the monies received by J.P. Morgan in respect of the
MEDS. A U.S. Holder will have a tax basis in such stock equal to the
U.S. Holder's tax basis in the MEDS (less the portion of the tax basis
of the MEDS allocable to any fractional share, as described in the
next sentence). A U.S. Holder will recognize gain or loss (which will
be short-term capital gain or loss) with respect to cash received in
lieu of fractional shares, in an amount equal to the difference
between the cash received and the portion of the basis of the MEDS
allocable to fractional shares (based on the relative number of
fractional shares and full shares delivered to the holder). If at
Maturity J.P. Morgan pays the MEDS in cash, a U.S. Holder will
recognize capital gain or loss equal to any difference between the
amount of cash received from J.P.
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Morgan and the U.S. Holder's tax basis in the MEDS at that time. Such
gain or loss generally will be long-term capital gain or loss if the
U.S. Holder has held the MEDS for more than one year at Maturity.
Due to the absence of authority as to the proper characterization of
the MEDS, Tax Counsel can provide no opinion as to the proper tax
characterization. No assurance can be given that the IRS will accept,
or that a court will uphold, the characterization and tax treatment
described above. In particular, the IRS could seek to analyze the
federal income tax consequences of owning a MEDS under Treasury
regulations governing contingent payment debt instruments (the
"Contingent Payment Regulations"). The Contingent Payment Regulations
are complex, but very generally apply the original issue discount
rules of the Internal Revenue Code to a contingent payment debt
instrument by requiring that original issue discount be accrued every
year at a "comparable yield" for the issuer of the instrument,
determined at the time of issuance of the obligation. In addition, the
Contingent Payment Regulations require that a projected payment
schedule, which results in such a "comparable yield", be determined,
and that adjustments to income accruals be made to account for
differences between actual payments and projected amounts. To the
extent that the comparable yield as so determined exceeds the interest
actually paid on a contingent debt instrument, the owner of that
instrument will recognize ordinary interest income in excess of the
cash the owner receives. In addition, any gain realized on the sale,
exchange or redemption of a contingent payment debt instrument will be
treated as ordinary income. Any loss realized on such sale, exchange
or redemption will be treated as an ordinary loss to the extent the
holder's original issue discount inclusions with respect to the
obligation exceed prior reversals of such inclusions required by the
adjustment mechanism described above. Any loss realized in excess of
such amount generally will be treated as a capital loss.
J.P. Morgan will take the position that the MEDS are not debt
instruments and therefore that the Contingent Payment Regulations do
not apply to the MEDS. The MEDS are payable by the delivery of Ethan
Allen Common Stock (unless J.P. Morgan exercises its option to deliver
cash at Maturity) and provide economic returns that are indexed to the
performance of Ethan Allen Common Stock. The MEDS therefore offer no
assurance that holder's investment will be returned to the holder at
Maturity. Accordingly, J.P. Morgan's position is that the MEDS
properly are characterized for tax purposes, not as debt instruments,
but as forward purchase contracts in respect of which holders have
deposited a fixed amount of cash with J.P. Morgan, on which interest
is payable at a fixed rate. If, however, the IRS were successfully to
maintain that the Contingent Payment Regulations applied to the MEDS,
then, among other matters, the holder would be required to accrue
interest income on a current basis at the "comparable yield", which
rate would exceed the coupon rate on the MEDS, gain realized by a
holder on the sale or other taxable disposition of a MEDS (including
as a result of payments made at Maturity) generally would be
characterized as ordinary income, rather than as short- or long-term
capital gain (depending on whether the MEDS had been held for more
than one year at the time of such disposition), and a U.S. Holder
would recognize ordinary income, or ordinary or capital loss (as the
case may be, under the rules summarized above) on
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the receipt of Ethan Allen Common Stock, rather than capital gain or
loss upon the ultimate sale of such stock.
Even if the Contingent Payment Regulations do not apply to the MEDS,
it is possible that the IRS could seek to characterize the MEDS in a
manner that results in tax consequences to initial holders of the MEDS
different from those reflected in the Indenture and described above.
Under alternative characterizations of the MEDS, it is possible, for
example, that a MEDS could be treated as including a forward contract
and one or more options.
Non-United States Persons
In the case of a holder of the MEDS that is not a U.S. person,
payments made with respect to the MEDS should not be subject to U.S.
withholding tax, provided that such holder complies with applicable
certification requirements. Any capital gain realized upon the sale or
other dispositions of the MEDS by a holder that is not a U.S. person
will generally not be subject to U.S. federal income tax if (i) such
gain is not effectively connected with a U.S. trade or business of
such holder and (ii) in the case of an individual, such individual is
not present in the United States for 183 days or more in the taxable
year of the sale or other disposition or the gain is not attributable
to a fixed place of business maintained by such individual in the
United States.
Backup Withholding and Information Reporting
A holder of the MEDS may be subject to information reporting and to
backup withholding at a rate of 31 percent of certain amounts paid to
the holder unless such holder provides proof of an applicable
exemption or a correct taxpayer identification number, and otherwise
complies with applicable requirements of the backup withholding rules.
Any amounts withheld under the backup withholding rules are not an
additional tax and may be refunded or credited against the U.S.
Holder's U.S. federal income tax liability, provided the required
information is furnished to the IRS.
Underwriting
J.P. Morgan Securities Inc. (the "Underwriter") has agreed, subject to
the terms and conditions set forth in the Underwriting Agreement, to
purchase all the MEDS from J.P. Morgan.
The Underwriter proposes to offer the MEDS from time to time for sale
in one or more negotiated transactions, or otherwise, at market prices
prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. In connection with the sale of
any MEDS, the Underwriter may be deemed to have received an
underwriting discount equal to the difference between the amount
received by the Underwriter upon the sale of such MEDS and the price
at which the Underwriter purchased such MEDS from J.P. Morgan.
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J.P. Morgan has agreed in the Underwriting Agreement to indemnify the
Underwriter against certain liabilities, including liabilities under
the Securities Act, or contribute to payments the Underwriter may be
required to make in respect thereof.
J.P. Morgan has been advised by the Underwriter that it may make a
market in the MEDS; however, J.P. Morgan cannot provide any assurance
that a secondary market for the MEDS will develop.
This Prospectus Supplement and the Prospectus may be used by direct or
indirect wholly-owned subsidiaries of J.P. Morgan in connection with
offers and sales related to secondary market transactions in the MEDS.
Such subsidiaries may act as principal or agent in such transactions.
Such sales will be made at prices related to prevailing market prices
at the time of a sale.
The Underwriter is an indirect wholly-owned subsidiary of J.P. Morgan.
The offer and sale of the MEDS by the Underwriter will comply with the
requirements of Section 2720 of the Bylaws of the National Association
of Securities Dealers, Inc. regarding underwriting of securities of an
affiliate.
In connection with the offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of
the MEDS or the Ethan Allen Common Stock. Specifically, the
Underwriter may overallot in connection with the offering, creating a
syndicate short position. In addition, the Underwriter may bid for,
and purchase, MEDS or Ethan Allen Common Stock in the open market to
cover syndicate shorts or to stabilize the price of the MEDS or the
Ethan Allen Common Stock. Finally, an underwriting syndicate may
reclaim selling concessions allowed for distributing the MEDS in the
offering, if the syndicate repurchases previously distributed MEDS in
syndicate covering transactions, stabilization transactions or
otherwise. Any of these transactions may stabilize or maintain the
price of the MEDS or the Ethan Allen Common Stock above independent
market levels. The Underwriter is not required to engage in any of
these activities, and may end any of them at any time.
Legal Opinions
The validity of the MEDS will be passed upon for J.P. Morgan by Gene
A. Capello, Vice President and Assistant General Counsel of J.P.
Morgan. [Cravath, Swaine & Moore has represented the Underwriter in
connection with the issuance of the MEDS. Cravath, Swaine & Moore has
represented and continues to represent J.P. Morgan from time to time
in other matters.] Mr. Capello owns or has the right to acquire a
number of shares of common stock of J.P. Morgan equal to or less than
0.01% of the outstanding common stock of J.P. Morgan.
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Experts
The financial statements incorporated by reference in the Annual Report on
Form 10-K of J.P. Morgan for the year ended December 31, 1997 (included in
J.P. Morgan's Annual Report to Stockholders), are incorporated by reference
in this Prospectus Supplement in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
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